lunes, 23 de febrero de 2015

The bosses of HSBC
have admitted they were shamed and humbled by the tax avoidance
activities of the group’s Swiss banking arm as the bank revealed its
chief executive, Stuart Gulliver, received £7.6m in pay and bonuses last
year.

Gulliver, speaking for the first time since the Guardian and other
news outlets published a series of revelations about HSBC’s Swiss
operations, offered his “sincerest apologies” but was defiant about the
account he had with the bank in Geneva which sheltered millions of pounds in a Swiss account through a Panamanian company.
The 55-year-old who became chief executive in 2011, was born in Britain
but is tax domiciled in Hong Kong, where the bank has major operations.

Europe’s biggest bank published results showing a 17% fall in profits
to $18.7bn (£12.2bn) as the investment banking arm slumped and $1.2bn
of fines and other conduct issues hit the bottom line.

To justify his tax status, Gulliver said: “I would expect to die
abroad.”Gulliverleft the UK in 1980 and came back for postings with the
bank in 2003.

He admitted the bank was shamed by the events at its Swiss bank and
hit out at the idea he should know what every one of the firm’s 257,000
employees were doing. He asserted that the bank was being held to a
higher standard of account than the church and armed forces.

“I would say that a number of us, myself included, think that the
practices at the Swiss private bank in the past are a source of shame
and reputational damage to HSBC. Yes, I think shame is an appropriate
noun,” said Gulliver.

“One of the largest impacts has been on morale inside HSBC. All of us
are subject to scrutiny from our families, our friends and people we
meet generally in our everyday lives. It makes people embarrassed at
HSBC and concerned,” he added.

Chairman Douglas Flint, who has been with the bank since 1995, said it was “totally humbling”.

The results, along with a relaxing of its target to provide returns
to shareholders, knocked 5% off the share price of Europe’s biggest bank
and made it the biggest faller on the stock market.

HSBC revealed that 1,178 of its top staff were paid at least €1m
(£738,000) last year – it was 330 under a different measure the previous
year – and Flint said it would be inappropriate for Gulliver’s pay to
be docked to reflect the Swiss bank revelations. His £7.6m compares with
£8m in 2013 and had been cut by £500,000 last year because of fines for
foreign exchange rigging and other regulatory matters.

The bonus payouts angered trade unions and politicians. The TUC
general secretary, Frances O’Grady, said: “It is hard to see why HSBC is
paying bonuses at a time when their role in tax evasion and avoidance
has become so controversial.”

Cathy Jamieson, a shadow treasury minister who called for a bonus tax
and wants George Osborne to answer questions on the matter, said:
“People will be astounded that bonuses of this size are still being paid
out after the revelations of the last few days.”

Gulliver said it was no coincidence that Swiss breaches coincided with money laundering through HSBC’s Mexican bank in the mid-2000s,
for which the US has fined the bank £1bn. Gulliver, who used to run the
investment bank, said HSBC had grown too large and that its management
lost control of the business during the financial crisis. The bank had
35,000 employees when he joined in 1980 and by 2007 the number had grown
to 330,000. “We diluted the culture while management were concentrating
on trying to get through the financial crisis,” said Gulliver.

He defended his use of a Swiss bank account saying that in the 1980s
accounts were free to access on the bank’s dealing floor in Hong Kong
where he was based. The highest-paid employee, he used a Swiss account
to hide his bonuses from colleagues and then used a Panama structure to
hide the details from Swiss colleagues. He did not answer when asked if
he still had a Swiss account and did not know whether colleagues were
still paid through Panama.

“I have never paid less than the maximum UK marginal tax rate,” said Gulliver.

“There is absolutely no story here,” said Flint of the chief
executive’s bank account. “There is nothing that Stuart has done that is
not absolutely transparent, legal and appropriate.”

Flint also apologised: “We deeply regret and apologise for the conduct and
compliance failures highlighted which were in contravention of our own
policies as well as expectations of us. Flint, who is giving evidence to
the Treasury select committee of MPs on Wednesday, said the business
had been overhauled and the Swiss bank customer base shrunk by one third
from their size in 2007.

In its annual report published on Monday, HSBC listed investigations
into the Swiss affair by tax administration, regulatory and law
enforcement authorities around the world, including in Belgium, France,
Argentina, Switzerland
and India. It warned more could follow and that there “is a high degree
of uncertainty as to the terms on which they will be resolved and the
timing of such resolutions, including the amounts of fines, penalties
and/or forfeitures imposed on HSBC, which could be significant”.

“In light of the recent media attention regarding these matters, it
is possible that other tax administration, regulatory or law enforcement
authorities will also initiate or enlarge similar investigations or
regulatory proceedings,” the bank said. There has been no contact from
the UK authorities since the latest revelations.

Details of HSBC’s Switzerland activities were obtained by Herve
Falciani, a former employee of the bank in 2008, and relate to the
period 2005 to 2007. Since being published by the International
Consortium of Investigative Journalists – which has collaborated with
the Guardian and other media outlets in publishing the leaks, including
Le Monde and BBC Panorama – they have unleashed a political storm in the
UK.

The bank said Sir Simon Robertson, the former Goldman Sachs banker,
had agreed to stay on the board for another year as deputy chairman
instead of leaving as his nine year tenure – a typical timeframe as a
non-executive – had been reached. He said that the £1.5m base salary of
Flint was being reviewed.

Robertson, who chairs the bank’s remuneration committee, said: “The
number and volume of regulatory changes that have been and are being
proposed in connection with remuneration are, in the Committee’s view,
excessive and are hindering our ability to communicate with any
certainty to our current employees and potential employees the
remuneration policies and structures that would apply to them.”

A year ago,
HSBC had said Gulliver would get a £1.7m annual allowance on top of his
£1.2m salary and other bonuses. The allowance is being used by HSBC and
other banks to sidestep the EU’s bonus cap, which limits bonuses to one
times salary or two-times if shareholders approve.

Flint also urged the UK to say in the EU. “One economic uncertainty
stands out for a major financial institution headquartered in the UK,
that of continuing UK membership of the EU. Today, we publish a major
research study which concludes that working to complete the single
market in services and reforming the EU to make it more competitive are
far less risky than going it alone, given the importance of EU markets
to British trade,” he said.

Original Link http://www.theguardian.com/business/2015/feb/23/hsbc-chief-paid-7m-pounds-last-year-profits-slide-tax-avoidance-apology#img-1

domingo, 22 de febrero de 2015

The United States must resist a return to spheres of interest in the international system

By Robert Kagan | February 19, 2015Brookings Institution

Great
power competition has returned. Or rather, it has reminded us that it
was always lurking in the background. This is not a minor development in
international affairs, but it need not mean the end of the world order
as we know it.

The
real impact of the return of great power competition will depend on how
the United States responds to these changes. America needs to recognize
its central role in maintaining the present liberal international order
and muster the will to use its still formidable power and influence to
support that order against its inevitable challengers.

Competition
in international affairs is natural. Great powers by their very nature
seek regional dominance and spheres of influence. They do so in the
first instance because influence over others is what defines a great
power. They are, as a rule, countries imbued with national pride and
imperial ambition. But, living in a Hobbesian world of other great
powers, they are also nervous about their security and seek
defense-in-depth through the establishment of buffer states on their
periphery.

Historically,
great power wars often begin as arguments over buffer states where
spheres of influence intersect—the Balkans before World War I, for
instance, where the ambitions of Russia and Austria-Hungary clashed. But
today’s great powers are rising in a very different international
environment, largely because of the unique role the United States has
played since the end of the Second World War. The United States has been
not simply a regional power, but rather a regional power in every
strategic region. It has served as the maintainer of regional balances
in Europe, Asia, and the Middle East. The result has been that, in
marked contrast to past eras, today’s great powers do not face
fundamental threats to their physical security.

So, for example, Russia objectively has never enjoyed greater security in its history than it has since 1989. In the 20th
century, Russia was invaded twice by Germany, and in the aftermath of
the second war could plausibly claim to fear another invasion unless
adequately protected. (France, after all, had the same fear.) In the 19th
century, Russia was invaded by Napoleon, and before that Catherine the
Great is supposed to have uttered that quintessentially Russian
observation, “I have no way to defend my borders but to extend them.”
Today that is not true. Russia faces no threat of invasion from the
West. Who would launch such an invasion? Germany, Estonia, Ukraine? If
Russia faces threats, they are from the south, in the form of militant
Islamists, or from the east, in the form of a billion Chinese standing
across the border from an empty Siberia. But for the first time in
Russia’s long history, it does not face a strategic threat on its
western flank.

Much
the same can be said of China, which enjoys far greater security than
it has at any time in the last three centuries. The American role in
East Asia protects it from invasion by its historic adversary, Japan,
while none of the other great powers around China’s periphery have the
strength or desire now or in the foreseeable future to launch an attack
on Chinese territory.

Therefore,
neither Chinese nor Russians can claim that a sphere of influence is
necessary for their defense. They may feel it necessary for their sense
of pride. They may feel it is necessary as a way of restoring their
wounded honor. They may seek an expanded sphere of influence to fulfill
their ambition to become more formidable powers on the international
stage. And they may have concerns that free, nations on their periphery
may pass the liberal infection onto their own populaces and thus
undermine their autocratic power.

The
question for the United States, and its allies in Asia and Europe, is
whether we should tolerate a return to sphere of influence behavior
among regional powers that are not seeking security but are in search of
status, powers that are acting less out of fear than out of ambition.
This question, in the end, is not about idealism, our commitment to a
“rules-based” international order, or our principled opposition to
territorial aggression. Yes, there are important principles at stake:
neighbors shouldn’t invade their neighbors to seize their territory. But
before we get to issues of principle, we need to understand how such
behavior affects the world in terms of basic stability

On
that score, the historical record is very clear. To return to a world
of spheres of influence—the world that existed prior to the era of
American predominance—is to return to the great power conflicts of past
centuries. Revisionist great powers are never satisfied. Their sphere of
influence is never quite large enough to satisfy their pride or their
expanding need for security. The “satiated” power that Bismarck spoke of
is rare—even his Germany, in the end, could not be satiated. Of course,
rising great powers always express some historical grievance. Every
people, except perhaps for the fortunate Americans, have reason for
resentment at ancient injustices, nurse grudges against old adversaries,
seek to return to a glorious past that was stolen from them by military
or political defeat. The world’s supply of grievances is inexhaustible.

These
grievances, however, are rarely solved by minor border changes. Japan,
the aggrieved “have-not” nation of the 1930s, did not satisfy itself by
swallowing Manchuria in 1931. Germany, the aggrieved victim of
Versailles, did not satisfy itself by bringing the Germans of the
Sudetenland back into the fold. And, of course, Russia’s historical
sphere of influence does not end in Ukraine. It begins in Ukraine. It
extends to the Balts, to the Balkans, and to heart of Central Europe.

The
tragic irony is that, in the process of carving out these spheres of
influence, the ambitious rising powers invariably create the very
threats they use to justify their actions. Japan did exactly that in the
30s. In the 1920s, following the Washington Naval Treaty, Japan was a
relatively secure country that through a combination of ambition and
paranoia launched itself on a quest for an expanded sphere of influence,
thus inspiring the great power enmity that the Japanese had originally
feared. One sees a similar dynamic in Russia’s behavior today. No one in
the West was thinking about containing Russia until Russia made itself
into a power that needed to be contained.

If
history is any lesson, such behavior only ends when other great powers
decide they have had enough. We know those moments as major power wars.

The
best and easiest time to stop such a dynamic is at the beginning. If
the United States wants to maintain a benevolent world order, it must
not permit spheres of influence to serve as a pretext for aggression.
The United States needs to make clear now—before things get out of
hand—that this is not a world order that it will accept.

And
we need to be clear what that response entails. Great powers of course
compete across multiple spheres—economic, ideological, and political, as
well as military. Competition in most spheres is necessary and even
healthy. Within the liberal order, China can compete economically and
successfully with the United States; Russia can thrive in the
international economic order uphold by the liberal powers, even if it is
not itself liberal.

But
security competition is different. It is specifically because Russia
could not compete with the West ideologically or economically that Putin
resorted to military means. In so doing, he attacked the underlying
security and stability at the core of the liberal order. The security
situation undergirds everything—without it nothing else functions.
Democracy and prosperity cannot flourish without security.

It
remains true today as it has since the Second World War that only the
United States has the capacity and the unique geographical advantages to
provide this security. There is no stable balance of power in Europe or
Asia without the United States. And while we can talk about soft power
and smart power, they have been and always will be of limited value when
confronting raw military power. Despite all of the loose talk of
American decline, it is in the military realm where U.S. advantages
remain clearest. Even in other great power’s backyards, the United
States retains the capacity, along with its powerful allies, to deter
challenges to the security order. But without a U.S. willingness to use
military power to establish balance in far-flung regions of the world,
the system will buckle under the unrestrained military competition of
regional powers.

Robert Kagan is a senior fellow with the Project on International Order and Strategy in the Foreign Policy program at Brookings. His most recent book is the New York Times bestseller, The World America Made.
Kagan also serves as a member of the secretary of state’s foreign
affairs policy board and is co-chairman of the bipartisan working group
on Egypt. He writes a monthly column on world affairs for the Washington
Post, and is a contributing editor at The New Republic. He served in
the State Department from 1984 to 1988 as a member of the policy
planning staff, principal speechwriter for Secretary of State George P.
Shultz, and as deputy for policy in the Bureau of Inter-American
Affairs.

Hungary Chooses Sides to Meet Its Needs

February 19, 2015 | 22:28 GMT

Analysis

For
years, Hungary has maintained a balance among its opposing Russian and
European benefactors. Hungary depends on Russia for much of its natural
gas imports. A new interconnector from Slovakia is slated to come online
soon, but it would meet only about half of Hungary's demand, forcing it
to continue relying on Russia. At the same time, Hungary depends on the
European Union for trade and funding and on NATO for security.

Hungarian
Prime Minister Viktor Orban's goal is to reach a flexible and
affordable energy deal with Russia without losing NATO's security
guarantees or the extensive funding and trade benefits it receives as an
EU member. In order to achieve this goal, Budapest is attempting to
fulfill Russia's demands that Hungary avoid cooperating with key
European energy projects and the West's need for Hungary's commitment as
a security ally.

Orban's schedule reveals this frantic effort to maintain his balance between Russia and the West. On Feb. 2, Orban held talks with German Chancellor Angela Merkel
in Budapest. On Feb. 11, Orban met with Serbian Deputy Prime Minister
Ivica Dacic, and the following day he met with Polish Foreign Minister
Grzegorz Schetyna. On Feb. 13, Orban traveled to Kiev to meet with
Ukrainian President Petro Poroshenko. On Feb. 16, he met informally with
Serbian Prime Minister Alexander Vucic, and the day after that he
hosted Russian President Vladimir Putin in Budapest. Two days later,
Orban visited Warsaw and met with Polish Prime Minister Ewa Kopacz. That
same day, the Kazakh government announced that Orban would visit the
country in April.

For Russia, Hungary has grown more important throughout the Ukraine crisis. Hungary's ability to send natural gas reverse flows to Ukraine undermines one of Russia's main ways to influence Ukraine.
Growing tensions between the European Union and Russia have also
provided the impetus for more discussions about forming a European
Energy Union, which would reduce Russia's leverage in European energy
markets. Moreover, as a member of the European Union, Hungary has the
ability to veto European sanctions against Russian individuals and
companies, making it a strategic asset to block EU policy changes.

The Kremlin's interest in undermining plans for a European Energy Union
and reducing Ukraine's ability to import natural gas from the European
Union have enhanced Orban's negotiating position with Russia.
Furthermore, falling natural gas prices have made the Kremlin more open
to providing new, more flexible natural gas arrangements. Negotiations
yielded a deal for Gazprom to waive its take-or-pay clause for Hungary,
allowing the country to purchase over the next four or five years
natural gas volumes that were included in its current contract but
remain unused, and to pay for the supplies once they are actually used.

Orban
has indicated that Hungary now pays $260 per thousand cubic meters for
natural gas supplies. In 2013, the country paid about $391 per thousand
cubic meters. Orban said that Hungary would be better off avoiding a
long-term contract that ties the price of natural gas imports to the
price of oil. Gazprom's contracts have traditionally been indexed to oil
prices, but Orban's announcement signals that Hungary could be allowed
to continue paying a relatively low rate for natural gas over the next
few years regardless of oil price fluctuations.

The natural gas
deal's favorable terms have come with concrete demands from Russia,
which Orban has vowed to fulfill. A day after Putin's visit, Orban
publicly announced that Hungary would not support a European Energy
Union and would not provide Russian natural gas reverse flows to
Ukraine. Moreover, during his meeting with Putin, Orban emphasized that
Hungary would support proposals for a pipeline to connect the planned
Russian-backed Turkish Stream pipeline to Macedonian, Serbian and Hungarian markets.

For the West, as for the Kremlin, Hungary has become significant as a result of the crisis in Ukraine.
Orban's moves to meet Putin's demands have been met with disapproval in
European capitals. The Polish prime minister described the discussion
of Ukraine and prospects of regional cooperation with Orban on Feb. 19
as "honest and difficult."

Nevertheless, as a NATO member country
bordering Ukraine, Hungary is a strategic ally for the West. If NATO
ever needed to conduct air operations near its eastern boundary, for
example, Hungary's four airfields, along with airfields in Poland,
Slovakia, Romania, and Bulgaria, would be ideally suited because of
their proximity in the region. Moreover, most EU policy changes require
the consent of all members. European countries are hopeful that Hungary
would cooperate on some projects that would boost energy
interconnectivity and security throughout the bloc.

Despite
Hungary's cooperation with Russia on energy, Budapest is committed to
maintaining its security and economic ties with the West. Russia is
undergoing its own financial crisis and could not replace Europe
as a top investor in Hungary. At the same time, Hungarian leaders know
that Russia, while geographically far, could threaten Hungary's security
in the event of a significant escalation of hostilities in Ukraine and
an overt Russian military intervention in the country. While Hungary has
not pressed for greater NATO presence in the region, Hungary will remain an active NATO member in order to guarantee its security.

Orban's
series of meetings shows he will take care of Hungary's immediate need
first: energy. However, Hungary also will take care to maintain ties
with the West out of financial and security needs.

Stratfor provides global awareness and guidance to individuals, governments and businesses around the world.

domingo, 15 de febrero de 2015

EASTASIAFORUM

The high price of 'free trade' with the United States

It is well known that the many bilateral FTAs signed to date in Asia have not brought significant commercial or domestic reform or benefits.
For one thing, bilateral 'free trade agreements' (which are
preferential in character) are less likely to deliver substantial trade
opening benefits unless the partners to them are a very large part of
global trade, like the United States, Europe and China are for example.
For another, liberalisation under the agreement needs to be
comprehensive and not carve out sensitive sectors. What economic
analysts understand is that even if a country like the United States is
participating in a bilateral preferential agreement there is no
guarantee that overall economic benefits to its partner(s) will be
positive. They could be positive; they could be negative: it all depends
on the nature and circumstances of the agreement. A decade down the
track, the high price that Australia paid for the conclusion of the
Australia–United States Free Trade Agreement (AUSFTA) has become crystal
clear.

In our lead essay this week (see below),
Shiro Armstrong explains how the critics of the controversial agreement
at the time were right. His analysis of the impact of the agreement on
trade flows shows that the agreement diverted trade away from the lowest
cost sources of import supply to Australian consumers. 'Australia and
the United States have reduced their trade by US$53 billion with rest of
the world and are worse off than they would have been without the
agreement'.

Preferential
trade agreements have two main effects: one that is positive and one
that is negative. The positive effect comes from the exposure of
uncompetitive, sheltered home producers to competition from lower cost
partner country suppliers. The problem was that AUSFTA did not remove
any of the significant barriers that protected high cost US agricultural
sectors like sugar, dairy or even beef. The negative effect is that
these agreements divert trade away frommore efficient and competitive
third country suppliers towards partner suppliers who only become
competitive because of the preferential treatment they receive under the
agreement. This discrimination is built into the nature of these
agreements. Optimistically, discrimination against outsiders provides
incentives for other countries to join the game and negotiate
preferential deals of their own that will negate the discrimination they
face — so long as that possibility is open. The question is where the
balance of costs and benefits lies. It's a question, as Armstrong says,
that can be estimated with a fair degree of confidence in advance but
judged with much more certainty after implementation of these
arrangements.

At
the time AUSFTA was being negotiated, a comprehensive study for the
Australian Senate Trade Committee warned that it would bring little or
no benefit. But AUSFTA was rushed ahead and signed within a year —
driven by the political determination of Australia's then prime
minister, John Howard, to do a deal with US president George W. Bush
after agreement to join the Iraq War. The cost of whatever political
gain derived from the deal has not been trivial. And pertinently, only
someone unprepared to face the facts would not now acknowledge the costs
of the agreement in terms of the opportunity to spend income lost
through its implementation on larger defence procurements and political
security. Let's be clear. Australia alone has suffered trade losses the
annual equivalent of the current price of around 18 Japanese, German,
Swedish or French submarines through this deal. This is big money lost.

Vague,
misguided appeals to political and security benefit from arrangements
like this must be tested against the corrosion of national strength and
independence calculated in terms of very substantial trade and income
losses and how they impact on political as well as economic strength.
Recently Australia has concluded bilateral trade arrangements with South
Korea, Japan and China. They promise to be more beneficial than the
'free trade' agreement with the United Statesthough all of them are less
than perfect.

With
difficulties in concluding the Doha Round, the hiatus in trade reform
has shifted emphasis to regional trade initiatives, like the
Trans-Pacific Partnership (TPP) negotiations of which the United States
is the leading proponent and the Regional Comprehensive Economic
Partnership in which ASEAN has taken the lead. There is more likelihood
of benefits from broader arrangements like these, if indeed they do
commit to substantial trade liberalisation. But there is no guarantee:
that will all depend on the nature of these agreements and the
circumstances of their conclusion, especially on whether they are
comprehensive in their coverage and really open to others to join. While
these initiatives can be used to prosecute regional economic and
political cooperation, they are unlikely to bereally beneficial unless
they are also directed to strengthening the global economic system.

The political pressure is now on to conclude the TPP agreement. The TPP might still turn out to be little more than a bunch of tactical bilateral deals that
won't do much to solve the problem of overlapping FTAs in the region —
one of its supposed core goals — and boost regional trade and incomes.
Much depends on Japan and the United States — whether Japan is prepared
to go for the 'zero option' on agricultural trade liberalisation and
whether the United States is prepared to sacrifice its vested
agricultural and other protectionist interests. A deal done simply to
tie a political bow around a 'free trade' arrangement between allies and
friends, new and old, would weaken not strengthen their economies and,
over the years, gnaw away at their regional economic and political
strength.

Peter DrysdaleEditor

9 February 2015

The costs of Australia’s ‘free trade’ agreement with America

8 February 2015

Author: Shiro Armstrong, ANU

The
critics were right. Ten years after the Australia–United States free
trade agreement (AUSFTA) came into force, new analysis of the data shows
that the agreement diverted trade away from the lowest cost sources.
Australia and the United States have reduced their trade by US$53
billion with rest of the world and are worse off than they would have
been without the agreement.

When
the Howard government was putting the agreement in place, there were
serious concerns about whether it would distort trade and impose costs
on the Australian community rather than expand and lower the costs of
trade. Even key officials who negotiated the deal had doubts about
whether what they could negotiate in the time they had under political
pressure would serve the national interest.

The
lead up to the agreement was accompanied by heated debate in Australia.
AUSFTA marked a departure from the primacy of unilateral and
multilateral trade and investment liberalisation in Australia’s foreign
economic policy strategy. The government turned to a strategy of
preferential liberalisation. Under the arrangement, US goods, services
and investment were to be given preferred treatment and better access to
Australian markets than those of all other countries.

Preferential
treatment can divert trade to the Australian market away from the most
efficient and competitive suppliers towards suppliers who would only
become competitive due to the special treatment they receive under the
regime. This discrimination is part of the design of these agreements
and is meant to give incentives for other countries to join the game and
negotiate preferential deals of their own to negate the discrimination
they face. Preferential agreements can also create efficient trade but
only if the lowest cost suppliers are included under the arrangement.

The
question is where the balance of costs and benefits lies. It’s a
question that can be estimated with a fair degree of confidence in
advance but judged with much more certainty after implementation of
these arrangements. Do these agreements divert more trade than they
create? Do they make us better off, economically speaking, or worse off?

Australia’s foray into preferential trade deals led to a review by the Productivity Commission of Bilateral and Regional Trade Agreements
in 2010. This report did not include analysis of AUSFTA, due to
insufficient data at the time the report was written, but it was
critical of preferential deals more generally and, along with the
overwhelming majority of research analysis, found very little evidence
of significant gains from preferential deals beyond benefits to a few
privileged sectors. Most studies of AUSFTA prior to the agreement
estimated that it would have little or no impact on the Australian
economy. While it was negotiating the agreement, the Department of
Foreign Affairs and Trade commissioned a study by the Centre for
International Economics that showed significant gains from concluding
AUSFTA. The results were driven by the assumption of a reduction in the
equity risk premium in Australia and there is no evidence that shows
this came to pass. This is the study that Ross Garnaut famously said did
not pass the laugh test.

Enough
time has now passed and there is enough data to update the Productivity
Commission’s model to estimate the effect of AUSFTA on trade. The
agreement was responsible for reducing — or diverting — $53.1 billion of
trade with the rest of the world by 2012. Imports to Australia and the
United States from the rest of the world fell by $37.5 billion and
exports to the rest of the world from the two countries fell by $15.6
billion over eight years to 2012.

Beyond
the $53 billion of trade that has been diverted, there is no evidence
that the agreement has been associated with an increase in trade between
the two countries, or the creation of efficient low cost trade. The
trade diversion from other partners suggests that Australia–US trade
would have fallen even further without AUSFTA.

The
Australia–US agreement did not prevent the share of US trade in
Australia from falling. It could not defy gravity with the rapid growth
of Asian economies, their competitiveness and their proximity to
Australia delivering lower cost and higher quality goods to the
Australian market, but it did provide a modest counterweight.

Some
dismissed the possibility of there being any trade diversion from
AUSFTA since Australian trade to East Asia continued to grow strongly
after AUSFTA came into force in 2005. That interpretation fails to
comprehend the appropriate benchmark, or counterfactual, needed to
assess what the effects of the agreement have been. Trade between
Australia and East Asian economies would have grown more — to the tune
of $53 billion for both the United States and Australia — than it
actually did if AUSFTA had not been put in place.

AUSFTA
was negotiated and signed within a year — a feat unmatched in trade
negotiations today — driven by the political determination of
Australia’s prime minister, John Howard, to do a deal with America’s
president, George W. Bush, after the second invasion of Iraq. One of the
conclusions from the Productivity Commission’s review of FTAs was that
their economic benefits are usually overstated and that they are often
more political than economic in their motivation. The cost of whatever
political gain derived from the deal has not been trivial.

Australia’s historic trade liberalisation efforts
produced clear welfare gains, and the winners and losers from these
reforms were determined by market forces and competition. Trade
agreements that introduce distortions and discriminatory treatment mean
that winners and losers are largely determined by preferences and
privileges assigned through negotiated treaties.

The US agreement carries important lessons for Australia in its future trade and foreign policy strategy.
The conclusions of the Productivity Commission’s review apply to
AUSFTA. Deals that are struck in haste for primarily political reasons
carry risk of substantial economic damage. The question then is whether
the economic costs of such policies are worth whatever the political
gain, and indeed, how the balance of properly calculated political gains
and costs might look.

Shiro
Armstrong is Co-Director of the Australia-Japan Research Centre at the
Crawford School of Public Policy, ANU and Editor of the East Asia Forum.
Further details of the model and results can be found in the paper on the author’s homepage.